This was an essay i wrote about the washington consensus for one of my modules, you may find it interesting, you may not, i admit it was a little rushed, but see what you think
Why have the principles of the Washington Consensus failed to deliver desired development goals in developing countries despite their theoretical approach?The concept of the Washington consensus was first developed by John Williamson, who has been an advocate of the policy in that many economists have sought to blame him for the policy not working when put into practice, although on the other hand the theoretical approach of the policy, where it has worked, has also been criticised when visible progression when using this policy, has been deemed to be only short term. A key example of this has been especially in Latin America, where the policy of ISI (import substituting subsidisation) required a reduced dependency on trade and imports and interaction within the world economy was reduced. The idea of the Washington consensus was to overturn this and open up developing countries up to investment, trade and exports especially as ISI policy countries suffered after an initial boom in their economies suffering economic collapse.The theory of the consensus was to reduce the role of state and allow foreign direct investment, and introduce neo-liberalist policies. So in essence the market place should determine the organisation of social, economic and political life, and the view of the market being the most efficient form of regulation, and a best distribution of resources within developing countries. With the influx of FDI, there has been thoughts of the idea of opening up investment in developing countries has exposed these countries to increased development but increased exploitation.
Some of the key theories behind neo-liberal policies in terms of reduced role of the state include deregulation of the economy, including the labour market, and privatisation of services. This can be seen as dangerous for developing countries as the reduced role of the state means less subsidies to industry and the population and less state spending on social services.
In theory the idea of the consensus could work if implemented correctly, and the three main themes of the consensus can seek to economic reform in developing countries. The theory of trade liberalisation especially in low income countries is pro-poor orientated in that it increases the demand for unskilled labour and decreases state subsidies into trade-reliant industries, and FDI helps growth and spread technology. The redirection of expenditure from state led industrial initiatives towards health and education is another key theory of the consensus, this in turn goes towards building human capital of the poor, investing in people is important in that it can be beneficial for industry and service led economies. Other benefits from the consensus are stated in “What Should the World Bank Think about the Washington Consensus?”
“…a well-conducted privatization with competitive bidding can raise efficiency and improve the public finances with benefits to all, including the poor. Deregulation in general involves the dismantling of barriers that protect privileged elites (even if some of them, like trade unionists, have difficulty thinking of themselves as an elite), and hence there is a strong presumption that it will be pro-poor”
John Williamsons Washington consensus originally had 10 points to it, as explained here, taken from “Did the Washington consensus fail?”
1. Fiscal Discipline. This was in the context of a region where almost all the countries had run large deficits that led to balance of payments crises and high inflation that hit mainly the poor because the rich could park their money abroad.
2. Reordering Public Expenditure Priorities. This suggested switching expenditure in a pro-poor way, from things like indiscriminate subsidies to basic health and education.
3. Tax reform. Constructing a tax system that would combine a broad tax base with moderate marginal tax rates.
4. Liberalizing Interest Rates. In retrospect I wish I had formulated this in a broader way as financial liberalization, and stressed that views differed on how fast it should be achieved.
5. A Competitive Exchange Rate. I fear I indulged in wishful thinking in asserting that there was a consensus in favour of ensuring that the exchange rate would be competitive, which implies an intermediate regime; in fact Washington was already beginning to subscribe to the two-corner doctrine.
6. Trade Liberalization. I stated that there was a difference of view about how fast trade should be liberalized.
7. Liberalization of Inward Foreign Direct Investment. I specifically did not include comprehensive capital account liberalization, because that did not command a consensus in Washington.
8. Privatization. This was the one area in which what originated as a neo-liberal idea had won broad acceptance. We have since been made very conscious that it matters a lot how privatization is done: it can be a highly corrupt process that transfers assets to a privileged elite for a fraction of their true value, but the evidence is that it brings benefits when done properly.
9. Deregulation. This focused specifically on easing barriers to entry and exit, not on abolishing regulations designed for safety or environmental reasons.
10. Property Rights. This was primarily about providing the informal sector with the ability to gain property rights at acceptable cost.
These ideas were backed up by the two major corporations the WTO and the IMF, and they sought that governments should pursue macro-economic stability by controlling inflation and reducing fiscal deficits, open their economies to the rest of the world through trade and capital account liberalization, and liberalize domestic product and factor markets through privatization and deregulation. This essentially involved the “rolling back of the state” and letting the markets dictate the services which were once state controlled. One key point to note is the Williamson never identifies the Washington consensus as a paradigm, and the 10 points are generalisations. The theory of opening up to competition has been seen to work within developed countries, but has not been seen in developing countries.
One idea that John Williamson seeks to point out in “Did the Washington consensus fail?” and “What Should the World Bank Think about the Washington Consensus?” is that his original vision of the consensus has been adapted so many times by different countries that the original theory has been blurred, and he also seeks to point out that countries that have suffered from crises have done so due to opening up capital account prematurely and letting money flood in and overvalue the currency.
This has been evident in Argentina when the Peso and us$ were at a rate of one to one, a serious overvalue of its currency. One quote that backs this up is one from “What Should the World Bank Think about the Washington Consensus?” stating:
“A competitive exchange rate is key to nurturing export-led and crisis-free growth and is hence in the general interest, including that of the poor”
Argentina did not consider this and in turn it suffered an economic crisis, although its ideas were good in theory, especially in considering the poor, this pro-poor policy could show benefits for rural development as there is evidence of the higher percentages of the poor live in rural areas, in developing countries.
The idea of opening up capital could cause an import of financial instability, with no consideration of the fact that policies should depend on “(i) the objectives of society; (ii) the degree of development of markets; (iii) the degree of homogeneity of domestic markets; and (iv) the nature of international institutions and markets” as stated in “Reforming the Reforms of the Washington Consensus” Another Pitfall from opening up markets too soon to FDI is that there is an even greater dependence on world financial markets, which can be open to crises when the country involved has an overvalued currency. There is also the case that reduced social provision will hit the population and increase prices, with reduced incomes for rural sectors.
One idea that has been suggested is a post-Washington consensus, although economists have been keen to point out that the policies suggested are guidelines and they should be points to consider and adapt to individual cases, not a global guidebook for economic reform, as each country is different, and consider which policy reforms should and should not be included.
Some of the failings of the consensus have been noted by many economists and although they do recognise its theoretical benefits, they are quick to point out case studies of where the consensus has failed. One interesting point is economic pressure that developing countries have come under from developed countries, mostly donor countries. It has been thought that countries who do not participate in the policy reforms would be cut off, and those who do participate are rewarded with FDI, and in turn technology advancements and market access. This can put pressure as countries who are left out feel they must embrace the consensus in order to advance, even if there markets are not economically ready and capable for FDI, and thus are open to exploitation. There is also the case that small; developing countries assume that foreign markets are always available, ignoring global demand for exports at the cheapest price. As has been mentioned the consensus is ideally a long term transformation of policy, although institutions such as the WTO and IMF as well as advocates of the consensus concentrate on performance of the policy reforms. This attention on short term performance and growth reduced the consideration of social needs within the specific countries, this is especially important as with the reduced state investment in social services doubles the effect as more money is concentrated into attracting FDI and industry. “The IMF’s push for full and fast liberalization of the capital account has been held accountable in large measure for the East Asian financial crisis.” (SCORING MILLENIUM GOALS)
As noted there have been calls for an alternative theory towards development, these alternatives are mostly known as a post-Washington consensus, which have emanated since the 1980’s. The two major theories have been UNDP’s sustainable human development approach (SHD) and the Southern Consensus. The Southern consensus has originated the theory of countries undertaking industrialisation in order to catch up to developed countries in search of trade; this has been as a result of the Washington consensus. They call for a change from the consensus’s top-down and outside led approach, and seek to change development towards investment in people, with closer partnerships between donor countries. One key point is that the SHD approach also specifically addressed the need for poverty reduction as a goal, whereas the Washington consensus assumes that economic development will ultimately in turn lead to poverty reduction.
As noted earlier the idea of open up unready markets and flooding the market is unviable, calls have been made to the use of strategic integration of the economy, rather than a rapid introduction of the economy into external trade and influences. The key idea of gradual change which is something which Latin American countries have failed to implement.
SCORING MILLENIUM GOALS has an interesting statement which considers the arguments against the Washington consensus and what can be done:
“In as much as the Washington Consensus served to redress the balance between
Markets and governments, it performed a valuable function. It focused attention on the importance of macroeconomic stability for growth; along with that of openness to trade; and of the case for privatization, deregulation and liberalization. What it can be criticized for is going too far in the opposite direction for too long; for neglecting the fact that one can have too much of “good policies” in that beyond a point, more of a good policy can be bad. That reducing budget deficits or inflation can be good does not mean the more the better.”
The document SCORING MILLENIUM GOALS also goes on to address what can be done now in terms of Washington consensus development and millennium development goals. In terms of macroeconomics it does state that there has been progress although there are concerns about fiscal management and governance.
“Improving Private Sector Enabling Environment: first, by further “progress toward outward-oriented strategies. Despite significant liberalization there is substantial scope for further reduction in trade barriers”. Also “the agenda includes efficient supply of services closely related to trade …… and improvement of the broader enabling environment for entrepreneurship and private investment”.” This is another consideration in which improvements can be made. Lastly it calls for the controlling of corruption in terms of tax reform, and improvements in tax administration.
Although the Washington consensus did set out policy reforms that would theoretically have benefited developing countries, it has merely been the case of poor implementation, interpretation of the consensus, poor market consideration, the reduced role of the state and corruption within these developing countries that have lead to their economic crises.
References
Did the Washington Consensus Fail?
John Williamson
Institute for International Economics
Outline of speech at the Center for Strategic & International Studies
Washington, DC
November 6, 2002
Diversity in Development – Reconsidering the Washington Consensus
FONDAD, The Hague, December 2004, www.fondad.org
Reforming the Reforms of the
Washington Consensus – Ricardo Ffrench-Davis
SCORING MILLENIUM GOALS: ECONOMIC GROWTH VERSUS
THE WASHINGTON CONSENSUS
Akbar Noman
(March 2005)
The Rise and Fall of the Washington Consensus as a
Paradigm for Developing Countries
CHARLES GORE *
United Nations Conference on Trade and Development, Geneva, Switzerland
World Development Vol. 28
What Should the World Bank Think
about the Washington Consensus?
John Williamson The World Bank Research Observer, vol. 15, 264 no. 2 (August 2000)
Reforming the Reforms of the
Washington Consensus – Ricardo Ffrench-DavisDiversity in Development – Reconsidering the Washington Consensus
FONDAD, The Hague, December 2004, www.fondad.org
Eldis – http://www.eldis.org/poverty/index.htm (18/01/06)
ODI – www.odi.org.uk
GTN – http://www.cid.harvard.edu/cidtrade/issues/washington.html
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